5. The Office of Government Commerce are responsible
for the promotion of improvements in the performance of departments
and agencies as purchasers of construction and for the dissemination
of good practice guidance to help achieve this. One of the Office's
key initiatives is the Achieving Excellence Programme launched
in March 1999 which includes an action plan for departments including
better specification of user requirements before design begins,
the use of risk management and performance indicators to improve
the delivery of construction projects, and post project completion
reviews to identify and implement lessons. The target date for
full implementation of the arrangements set out in the Achieving
Excellence Programme is March 2002.[5]

6. The Department of Environment, Transport and the
Regions have central responsibility for promoting improvements
within the construction industry and its clients. One of the Department's
key initiatives is the Movement for Innovation, established in
November 1998 to promote beneficial change in the construction
industry and to share good practice. One way in which the movement
does this is to encourage contractors and their clients to put
forward examples of good construction practice known as demonstration
projects, the lessons from which are disseminated to industry
and its clients through conferences and seminars.[6]

7. There have been numerous initiatives intended
to improve the performance of publicly funded construction projects,
but many projects are still completed significantly late and substantially
over budget. We therefore asked the Office of Government Commerce
and the Department of the Environment, Transport and the Regions
why their current initiatives were going to make a difference
when others have failed. They accepted that there were systemic
problems in the way construction projects are managed and delivered.
The difference, compared with the past, was that they now had
a strategy which included all the players involved in construction

both the industry and departments 
as well as a range of good practice experience which they were
actively promulgating. The Department also emphasised that there
was much more effective co-ordination at the central government
level which the Office of Government Commerce were leading. That
coordination should help to achieve more widespread implementation
of good practice, as well as more support by senior management
in departments to secure long-term improvements in the performance
of construction projects.[7]

Improving cost estimates

8. Because the emphasis on lowest price has resulted
in some construction firms pricing their work unrealistically
lowCon
the assumption that they will subsequently be able to recoup their
profit margins through contract cost variations and claims often
leading to disputes and litigationCthe
Office of Government Commerce has advised departments not to award
construction projects solely on the basis of lowest price bid.
The Office of Government Commerce expect departments to give careful
consideration to achieving value for money in awarding contracts,
such as designing and constructing buildings which are cost effective
to run and maintain over their whole operational life; this may
mean not accepting the lowest price tender.[8]

9. In explaining how they were persuading departments
to take construction procurement decisions based not just on price
but on quality, the Office of Government Commerce told us that
they were seeking to persuade departments through guidance, training
and the promulgation of case studies that illustrate the benefits
of taking a whole-life approach rather than just making decisions
on the basis of initial contract price. The Office also said that
they were requiring larger, more complex and novel projects to
be subject to independent peer reviews at critical points in their
development and implementation, and that this scrutiny would provide
a clear view as to whether construction decisions were being made
on achieving overall value for money rather than just minimising
the initial contract price.[9]

10. The Committee asked the Department of Environment,
Transport and the Regions whether they considered that cost estimates
for public sector construction projects were often over-optimistic.
We referred, in particular, to the extension to the Jubilee Underground
Line and whether the difficulties which this project had experienced
could have been avoided if the good practice which the Department
were promoting in construction management had been followed. The
Department told us that the improvements which they were promoting
were intended to prevent significant cost and time overruns in
the future. The Department considered that the performance of
the Jubilee Line project would have been better because the parties
would have identified at the beginning that the project was going
to cost more than the original estimates.[10]

11. We also asked the Department whether annual limits
on capital expenditure contributed to unrealistic estimates because,
in order to improve the chances of their construction projects
being approved, departments set their cost estimates to come within
annual expenditure targets. In these circumstances, however, the
project costs could increase significantly, following approval,
as estimates become more realistic. The Department explained that
there were three solutions to this problem. First expenditure
was now planned on a three-year basis and in some cases, such
as with the transport programme, over a ten-year period; second
Accounting Officers needed to exercise more vigilance in ensuring
that projects coming forward were affordable on a value for money
basis; and third departments needed to have proper budgeting and
business planning systems to secure better control of construction
projects.[11]

Measuring improvements in construction performance

12. There is no information yet available to quantify
the benefits being achieved from the implementation of the measures
intended to improve construction performance. But NHS Estates
estimate that a 10 per cent reduction in construction costs for
the NHS as a whole should release £300
million a year; Defence Estates estimate that a £250300
million reduction in the cost of constructing and running buildings
is achievable annually by 2005; and the Environment Agency predict
a 30 per cent (approximately £35
million) reduction in construction costs by 20082009.[12]

13. The Committee asked who would be the main beneficiaries
of these savings. The Department of the Environment, Transport
and the Regions advised that departments were incentivised because
they were not required to surrender such savings to the Treasury;
so, if they improved performance of their construction projects
and saved money, that released funds for other priority projects.[13]

14. In 1999 a benchmarking study of 66 central government
department construction projects with a total value of £500
million showed that 78 per cent were over budget and 70 per cent
were delivered late. We asked how that public sector performance
compared with that of the private sector. The Office of Government
Commerce did not have accurate data with which to make a comparison
but they noted that a number of private sector clients had achieved
dramatic improvements in building costs, construction times and
overall value for money in construction projects by employing
the techniques which the Office are advising departments to use
as part of the Achieving Excellence Programme. The Office admitted
that they did not have relative figures on public sector performance
over time, but that the 1999 benchmarking study had established
for the first time a comprehensive baseline position against which
they would be able to measure future improvements in the performance
of departments'
construction projects.[14]

Improving the performance of smaller government
organisations

15. Many departments fund building projects indirectly
through grants. For instance the Department for Education and
Employment and the Department for Culture, Media and Sport cover
a number of bodies which distribute funds for capital projects
such as the Sports Council and Arts Council. The Office of Government
Commerce have started discussions with these departments on how
they could contribute to improving construction procurement practices
among grant recipients.[15]

16. The Office of Government Commerce was asked what
progress they had made in promoting improvements in the way smaller
public sector organisations procure and manage construction projects.[16]
They told us that during the coming year, as a result of an internal
reorganisation, they expected to have 35 staff devoted to improving
construction performance compared to the ten they had currently
engaged on this work. Some of that increase in resources would
be focussed on documenting more good practice and promulgating
it to smaller departments and agencies. Staff would be given specific
responsibility for helping smaller public sector organisations
with their management of construction projects. The Office also
said they would be discussing with their Supervisory Board, which
is chaired by the Chief Secretary to the Treasury and included
a number of permanent secretaries, ways in which they might impress
on non-departmental public bodies the importance of adopting construction
good practice.[17]

Conclusions

17. We welcome recent initiatives to improve construction
performance. There have been, however, numerous previous initiatives
over many years which have failed to secure improvements. If the
current drive is to succeed it is essential that all departments
and their agencies promote change in the industry by improving
their management of construction projects through practices such
as clear project sponsorship and robust project management.

18. Ensuring that departments improve their performance
in managing construction projects requires reliable information
so that progress can be monitored and corrective action taken
where necessary. The Office of Government Commerce should monitor
what benefits are being achieved by departments against the baseline
established in 1999, should spread examples of good practice,
and should encourage departments to use this information to improve
their performance.

19. Much of the effort by the Office of Government
Commerce to improve the performance of construction projects is
directed at the large spending departments. Smaller departments
and agencies individually may spend less but collectively have
a substantial construction programme. The Office of Government
Commerce have started discussions with smaller departments on
how they can better their construction performance. The Office
should secure the adoption of the same rigorous project management
and controls and principles of achieving long-term value for money.